Saturday, January 22, 2011

Entrepreneurship & Size of the Business - Story of Reva

Over the weekend I was reading the book "Connecting the Dots" by Rashmi Bansal. In that book, there was the story of Chetan Maini & his "Reva Electric Car" . My wife owns a Reva car, and I am an adherent fan of Reva car. The story of Chetan Maini as mentioned in the book had to be read with the fact that Chetan Maini sold the controlling share of the company to Mahindra & Mahindra.

For many Reva fans, this was a good news. For Reva Electric Car Company, this was a major step towards becoming a success in the global stage. From a business & leadership point of view, Chetan Maini did the right thing by getting Mahindra & Mahindra Ltd as an investor in his nascent electric car company. Reva is the largest selling electric car in the world in terms of volume - but when compared to the scale of automobile industry, Reva cars account of less than 0.01% of the market.

As a business, Reva electric cars was operating at a sub-optimal scale and to be successful commercially, they needed to expand on production capacity and on dealership networks - but all this needs huge investments which Chetan Maini could not raise internally. This implied that he had to get an investment partner with automobile background and that partner happened to be Mahindra & Mahindra Ltd. With this move, Reva electric car company (now renamed as Mahindra-Reva Electric Car company) is on the move to become a large company.

Lessons for Entrepreneurs

In the world of business, it is common to see large companies buying out smaller ones. Here in this blog, I want to talk about the fundamentals of entrepreneurship & leadership needed to take a small startup on the path of becoming a big company.

Startups are of two types:
1) Lifestyle Startups: which cannot grow big - typically ends up as a Small or medium scale enterprise.
2) Enterprise Startups: Ones that can grow into a big business (say revenues of more than $100Million/year)

Small/medium business are typically run by individuals and the business is their sole source of income. These businesses are called as "lifestyle" business - as the venture is designed/built to support the lifestyle of the promoters/owners. These lifestyle startups typically start by serving a known set of customers and offer a known set of products/services. Once the business model is worked out, the business becomes profitable and the profits are used to maintain the lifestyle of the promoters. About 80% of all business fall in this category.

In case of Reva, it was not designed to be a small scale business. Reva is an enterprise startup - the one with a potential to grow into a Multi-Billion Dollar Business!

All startups have the potential to grow into a big business. Even simple sandwich shop can grow into multi-billion dollar venture - provided the leaders have the right vision and management skills.

In case of Reva, the founders had done all the right things to position the company on the path of becoming a big business. Let me explain little more about this.

Reva was started when the concept of commercially viable - street worthy electric cars was not viable. Reva was started at a stage when there were two major unknowns: unknown customer base, unknown features/functionality. Over a period of time, Reva worked on these two unknowns over 12 years to produce a car that would appeal to certain market segment. In order to do that, Reva had to:

1. Invent a business model - i.e. get vendors, channel partners etc.
2. Develop the product that meets the market requirement.
3. Develop a repeatable sales model
4. Build a team of capable managers.

It takes a high risk appetite to invest in a company that is yet to develop a business model. In other words - the startup at this stage needs a significant amount of risk capital. Reva managed to raise this "risk-capital" by raising debt financing of ~$3million in year 2000. With this funds and vision, Reva started off as a "startup".

Over the period of next six years, Reva managed to identify a small segment of customers - mainly in UK & Bangalore. Reva managed to sell ~1000 cars in Europe. By this time, Reva had to build the infrastructure that set Reva on path of becoming a large company. This involved setting up marketing systems, accounting systems, IT systems, and business measurement systems to manage the business. In the process Reva achieved a major milestone - Reva managed to validate market for electric cars through customer discovery, customer validation, get features/price trade-off worked out.

At this point, Reva was ready for its first major infliction point to start its journey to become a large company. This transition needed more capital, and Reva managed to raise a venture capital of $20 million in December 2006 from VCs.

Reva now had to build a scalable business - which implied setting up a new factory, identifying distribution & supply partners, implemented enterprise class ERP/IT, develop next generation technologies that were needed to address the needs of a much larger customer base. Reva invested in a new factory with a planned capacity of 30,000 cars per year (up from 3000 cars/year), developed a new model "Reva i" which was a major enhancement over its predecessor.

By 2009, Reva had set up a professional management in place, sales was taking off, and was ready for the big step. That big moment happened in September 2009 when General Motors licensed its technology for developing Chevy Spark.

At this stage, Reva was ready to transition from a "startup" to becoming a "large company". This transition needed a major change - the company had to join hands with a big player who could invest $200 million or more into the venture to make Reva Electric car company into a global player.

Mahindra & Mahindra was that partner who could invest big money needed to take Reva cars on the big stage & launch Reva cars all over the world. Typically during the transition, it is time for the founders to move out of management and let the company be managed by professionals. Here again, Reva founder - Chetan Maini did the right thing by handing over leadership to G.P. Goenka, who is the new Chairman of the board, and making Chandramouli as COO.

Now Reva Electric Car Company is ready for big time & is on firm path to become a large successful enterprise.

The new leadership has its job cutout: Make the company profitable, launch new products to widen the customer base, achieve rapid scale, hire more people and expand the business.

Closing Thoughts

Entrepreneurs typically start a company and set the company on the path of becoming a large business. Becoming a large company is a long arduous journey which many startups fail to complete. It takes capable leadership, excellent execution and above all sheer guts to go through the journey. And at the end, the founders must have the confidence to pass on the leadership to professional team and step aside for the new team to make their startup a truly large company. The story of Reva Electric Car is a text book case of entrepreneurship and management.

Note: I got the details of investments numbers from the book "Connecting the Dots" by Rashmi Bansal.

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